Kevin Lewis

October 03, 2018

Can fiscal rules constrain the size of government? An analysis of the “crown jewel” of tax and expenditure limitations
Paul Eliason & Byron Lutz
Journal of Public Economics, October 2018, Pages 115-144


Fiscal rules attempt to alter budget outcomes by constraining policy makers. They have been one of the primary responses to the recent string of fiscal crises around the globe. We ask if these rules succeed in altering fiscal outcomes by examining what is arguably the most stringent set of fiscal rules in the U.S. - Colorado's Taxpayer Bill of Rights (TABOR). As TABOR attempts to constrain both taxes and expenditures, we develop a novel approach of estimating treatment effects for multiple outcomes simultaneously using the synthetic control methodology of Abadie et al. (2010). Although there will always be a degree of uncertainty over external validity when a policy is enacted in only a single state, our results provide no evidence that TABOR affected the level of taxes or spending in Colorado and are precise enough to rule out large negative effects. Thus, no support is found for the contention that fiscal rules alter budget outcomes. Instead, TABOR appears to have been partly evaded by policy makers and voters despite its stringency and partly nothing more than a ratification of the state's preference over the size of its public sector.

The Dire Effects of the Lack of Monetary and Fiscal Coordination
Francesco Bianchi & Leonardo Melosi
Journal of Monetary Economics, forthcoming


If the government’s willingness to stabilize debt is waning, while the central bank is adamant about keeping inflation low, the economy enters a vicious spiral of higher inflation, monetary tightening, recession, and further debt accumulation. The mere possibility of this conflict represents a drag on the economy. A commitment to inflate away the debt accumulated during a large recession leads to welfare improvements and lower uncertainty by separating long-run fiscal sustainability from the short-run fiscal stimulus. This strategy can be used to avoid the zero lower bound. As a technical contribution, we explain how to build shock-specific policy rules.

Does federal contracting spur development? Federal contracts, income, output, and jobs in US cities
Andres Rodriguez-Pose & Michiel Gerritse
Journal of Urban Economics, September 2018, Pages 121-135


Firms and governments alike frequently court federal government contracts to generate more jobs and trigger economic growth. However, the employment and output impact of government contracts remains controversial. We use georeferenced data on United States (US) federal contracts, distinguishing between the location of the recipient and the location of the activity, for the years 2005-2014 in order to assess the employment and output impacts of federal contracting in metropolitan areas of the US. We resort to a shift-share instrument and precise location-specific fixed effects to estimate the causal impact of spending. Cities that receive more contract expenditure witness an expansion in output - with contracts generating $1.4 per dollar spent - but experience only modest increases in employment. The impact is also constrained geographically and short-lived. The results suggest that, on average, the effects of federal contracting on local economies are modest, meaning that attracting federal contracts may not be an effective urban development strategy.

Taxation and Innovation in the 20th Century
Ufuk Akcigit et al.
NBER Working Paper, September 2018


This paper studies the effect of corporate and personal taxes on innovation in the United States over the twentieth century. We use three new datasets: a panel of the universe of inventors who patent since 1920; a dataset of the employment, location and patents of firms active in R&D since 1921; and a historical state-level corporate tax database since 1900, which we link to an existing database on state-level personal income taxes. Our analysis focuses on the impact of taxes on individual inventors and firms (the micro level) and on states over time (the macro level). We propose several identification strategies, all of which yield consistent results: i) OLS with fixed effects, including inventor and state-times-year fixed effects, which make use of differences between tax brackets within a state-year cell and which absorb heterogeneity and contemporaneous changes in economic conditions; ii) an instrumental variable approach, which predicts changes in an individual or firm's total tax rate with changes in the federal tax rate only; iii) a border county strategy, which exploits tax variation across neighboring counties in different states. We find that taxes matter for innovation: higher personal and corporate income taxes negatively affect the quantity, quality, and location of inventive activity at the macro and micro levels. At the macro level, cross-state spillovers or business-stealing from one state to another are important, but do not account for all of the effect. Agglomeration effects from local innovation clusters tend to weaken responsiveness to taxation. Corporate inventors respond more strongly to taxes than their non-corporate counterparts.

You Want to Spend My Money How? Framing Effects on Tax Increases via Ballot Propositions
Travis Braidwood
State Politics & Policy Quarterly, forthcoming


Recent scholarly work has discovered that modest changes in the framing of the titles and summaries of ballot measures can have dramatic effects on voter approval. This work expands upon these findings by exploring the effect of language specificity on support for ballot propositions that require the voter to pay for the measure with tax dollars. Although extensive research has explored ballot measure language complexity (e.g., position on the ballot, electoral effects, and prepossessed knowledge have all been shown to play a role in the outcome for propositions), left unanswered is the role of detailed language in altering support. Utilizing original experimental data, this work explores the framing effects of increasing specificity of proposed use of tax expenditures on support for ballot questions. Ultimately, this research finds that propositions providing more information to voters substantially increases the likelihood of support for those measures. Moreover, this increased specificity also bolsters certainty as to how the money will be spent, and intensifies how strongly voters feel about the issues being considered.

Negative Externality of Fiscal Problems: Dissecting the Contagion Effect of Municipal Bankruptcy
Lang (Kate) Yang
Public Administration Review, forthcoming


The fiscal decision of one local government may spill over to other localities, and such externality could justify and inform policy making by a higher‐level government. Theories of municipal bond market contagion postulate that once a local government files for bankruptcy, localities sharing similar characteristics will be perceived negatively by creditors and charged a higher interest rate. In this article, empirical examination of the second‐largest municipal bankruptcy in American history shows no support for general contagion based on geographic proximity. That is, nearby localities did not pay a higher interest rate after the bankruptcy. However, case‐specific contagion formed around borrower‐ and bond‐specific characteristics contributing to the bankruptcy: general‐purpose borrowers and general‐obligation bonds experienced increased borrowing costs after the bankruptcy. These findings have implications for states considering granting authorizations for municipal bankruptcy or providing financial assistance to struggling localities, as well as for local governments planning to access the municipal bond market.

Raising the Stakes: Experimental Evidence on the Endogeneity of Taxpayer Mistakes
Naomi Feldman, Jacob Goldin & Tatiana Homonoff
National Tax Journal, June 2018, Pages 201-230


Recent evidence suggests consumers fail to account for taxes that are excluded from a good's displayed price. What is less understood is whether and how such "salience effects" depend on the magnitude of the tax. We conduct a laboratory shopping experiment with real stakes to study the effect of tax size on salience. We find no evidence that salience effects decline as the tax rate increases; we document a statistically significant salience effect at a tax rate that is considerably larger than the tax rates at which such effects have been previously documented. In fact, our results are more consistent with the hypothesis that higher taxes make consumers less attentive (at least for the range of taxes we consider). This result can be explained by a confirmation bias theory of salience: consumers tend to disregard information (like a tax) that does not align with their intention to purchase an item, and this lack of alignment increases in the size of the tax.

Do States Circumvent Constitutional Supermajority Voting Requirements to Raise Taxes?
Soomi Lee
State Politics & Policy Quarterly, forthcoming


To constrain legislative taxing power, 16 U.S. state constitutions require a supermajority in both chambers to increase or impose taxes. Both supporters and opponents of the requirement argue that its effect fades away because states circumvent it in various ways, especially by raising fees that are not subject to the requirement. Existing literature, however, offers little and inconsistent evidence on whether the effect decays over time and whether the decay results from fee hikes. This article documents legal cases to show the ways in which states have responded to the requirement, estimates whether the effects of the requirement decay over time, and tests whether states raise fees instead of taxes after adopting such a requirement. Using state-level panel data, I find that the initial effectiveness of the requirement on tax burden does decay approximately a decade after enactment and that the decay is not the result of fee increases.

Laying Foundations: New Deal Public Works and Aviation Infrastructure
Houston Johnson
Journal of Policy History, October 2018, Pages 695-726


This article examines New Deal public works agencies’ pivotal contributions to American aeronautical development, arguing that their creation of aviation-related infrastructure offers powerful evidence of the New Deal’s success in remaking the American landscape and fostering economic growth. Organizations such as the Civil Works Agency, the Public Works Administration, and the Works Progress Administration built or improved almost every contemporary U.S. airport, funding improvements that created the foundations of America’s modern air transport network. Much more than make-work endeavors, these efforts reflected New Dealers’ desire to use public works to create worthwhile products. These policies highlight the sophistication with which the New Deal promoted economic development, and belie the image of public works agencies privileging short-term employment to the detriment of economic gain. Airport terminals, runways, hangers, and countless other aviation-related improvements represent some of the New Deal’s most significant physical legacies, highlighting the Roosevelt administrations’ vital contributions to aeronautical development.


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